It seems as though businesses have specialized teams whose only job is to come up with new and outrageous fees to charge us.
We pay ATM fees to banks so we can access our money at night and on the weekend. After spending an arm and leg for an airline ticket, we fork over even more so the plane will carry our bag, too. If we need to make a last-minute payment, we may even be charged a convenience fee for the privilege of paying over the phone.
Of all the many fees you pay, which one is the worst? Which one has the most potential to take you to financial ruin?
The worst offender
Of all those bank fees, convenience fees and other random charges we pay, the worst by far are the ones attached to 401(k)s and other retirement accounts.
Federal regulations that went into effect in 2012 require 401(k) plan administrators to disclose fee information to employees, but 401(k) fees are still poorly understood and often overlooked by workers.
What’s more, the fees can seem deceptively small even though they can add up to hundreds of thousands of lost dollars.
Consider this example from the U.S. Department of Labor: Say you have a 401(k) with a current balance of $25,000. Over the next 35 years, you earn an average return of 7 percent on that balance. Even if you didn’t contribute another penny to your account during those 35 years, here’s how much money you’d have if your account fees were 0.5 percent, compared with how much money you’d have if your fees were 1.5 percent:
|Beginning balance||Annual return||Fees||Balance in 35 years|
So the higher fee cost you an additional $64,000 over 35 years — even though the fee was only 1 percent higher. That’s $64,000 less to live on in your golden years.
And that’s if your 401(k) had only $25,000 in it. Imagine how much money you would stand to lose in fees if you were more diligent about saving for retirement.
What you don’t know can cost you
It may be news to you that you’re paying 401(k) fees. That’s part of the problem. Although 401(k) plan administrators are required to disclose fees, some employees mistakenly believe that they don’t pay any expenses or fees for their plan.
There can be dozens of fees attached to a 401(k). They typically fall into one of three categories:
- Plan administration fees: These are fees associated with the cost of providing and maintaining your 401(k). They may be included in the investment fees or charged separately.
- Investment fees: These are fees you pay to have your money managed in an investment fund. These fees are listed on disclosure statements as a percentage that is often called an “expense ratio.”
- Individual service fees: These are fees attached to optional features offered by a 401(k) plan, such as fees for getting a 401(k) loan.
While these fees can cost you thousands of dollars each year, you might never know it because you don’t pay them directly. Instead, they are pulled out of your 401(k) automatically.
Without the pain of having to write a check to the investment firm for managing your account, it’s easy to miss the fact that fees can be a drain on your retirement savings.
How to lower your 401(k) fees
To stop the bleeding, you first need to assess the damage. Your 401(k) is required to provide an annual statement showing, among other things, the fees included in the plan. Pull it out and take a look at what you’re paying.
On average, American workers pay about 1 percent of their 401(k) plan assets in fees, including expense ratios and administrative fees, according to the Center for American Progress. But fees can be as low as 0.25 percent, depending on your plan and the investments you select.
Try these three ways to limit your fees:
- Invest in index funds: Actively managed mutual funds have higher fees than passively managed funds, aka index funds. Active funds also usually lag behind index funds in terms of performance. So invest your money in index funds tied to stock indexes, such as Standard & Poor’s 500, to reduce your costs and maybe even increase your returns.
- Leave your money alone: When you transfer funds, you usually pay a fee. Pretend your 401(k) is a rotisserie chicken: Set it and forget it. Well, you don’t want to forget it completely, but you shouldn’t be switching funds every time the market hiccups either.
- Talk to your employer: If you look through your plan disclosures and aren’t impressed with what you see, let your employer know. Ask if they would consider changes that may open up new fund options. Gather a few of your co-workers to approach the human resources department together in order to make a stronger case for your proposal. Under federal law, plan fiduciaries, who are usually employers, have an obligation to consider plan fees and operate plans in the interest of employees.
Do you know how much your 401(k) is costing you? If not, go find your plan’s disclosures now. Let us know what you find out and what you did about it by posting a comment below or on our Facebook page.